Deforestation: $906B At Risk Via 'Domino Effect' On The Supply Chain

No wonder Environmental, Social and Governance (ESG) risk has lain hidden for so long. Now that businesses are regularly being encouraged to look closer at their supply chains and disclose it, the implications are alarming: for businesses, investors and the planet. A new study released today reveals that, on average nearly a quarter (24%) of global company revenues depends upon four commodities linked to deforestation: cattle products, palm oil, soy and timber products. That translates, it says, to $906 billion in annual turnover potentially at risk.

This $906 billion figure has been calculated by looking at the percentage of revenues publicly listed companies say is dependent on the commodities they reported on.

The companies include big names, like Cargill, Kraft Heinz Company, Starbucks and Marks & Spencer, and global commodity traders Archer Daniels Midland and Bunge. CDP, formerly Carbon Disclosure Project, is an international, not-for-profit organization. Its new report "Revenue at risk: why addressing deforestation is critical to business success" analyzes data disclosed by 187 companies in 2016 - often for the first time - on their deforestation risk management strategies.

Who is behind the report? Some 365 investors representing $22 trillion. Deforestation leads to some 15% of global greenhouse gas emissions, as Paul Simpson, CEO of CDP, points out in his foreword to the report. Addressing deforestation is therefore critical to delivering a sustainable post-2020 global economy.

Indonesia approved palm oil concessions on nearly 15 million acres of peatlands over the past years and thousands of square miles have been cleared for plantations, including the lowland areas that are the prime habitat for orangutans. Photo by Ulet Ifansasti/Getty Images

It's a familiar story - why look ahead and rock the boat if you are a business with a seemingly reliable revenue stream? There is also that previously noted phenomenon of ostriches in the boardroom.

Fewer than half (42%) of companies have evaluated how the availability or quality of commodities linked to deforestation might have an impact on their growth strategy over the next five or more years, says the report.

“More than ever before, deforestation needs to be firmly on the boardroom agenda. With a clear financial dependency on these forest risk commodities, growing investor expectations, a changing regulatory environment, and the rise of consumer campaigns impacting brand reputations, companies’ deforestation actions are under intense scrutiny. Long-term profitability is at stake," says Mr. Simpson.

The report offers evidence from the top of global commodity supply chains. Some 81% of agricultural producers - who produce the commodities that are fed down through supply chains ending up in consumer products ranging from ice cream to toothpaste, footballs and lipstick - say they have experienced deforestation-linked impacts in the past five years that have led to substantive changes to their business, it reports.

Examples given include one from Marfrig Global Foods, which says drought conditions have resulted in higher operating costs and reduced beef production in the Brazilian industry. Wilmar International, the agribusiness group based in Singapore, cites impact on brand value as customers become more sophisticated in their demands for sustainable products that are traceable and deforestation-free. There is of course also the as yet unknown impact of millennials, and their values.

"Companies need to address the sustainability of products that drive deforestation quite simply to protect their balance sheets. Supply chains are like rows of dominoes: if unsustainable commodities enter the top of a supply chain, the effects will cascade throughout" ” says Katie McCoy, head of forests at CDP.

There is clearly a high degree of self-delusion in the boardrooms of even the businesses responding to CDP's request for information. Across the four commodities, 72% say they are confident they will be able to source these supplies securely and in a sustainable manner in the future. This is odd - not only do the majority of companies not evaluate the supply or quality of deforestation-linked commodities over the next five or more years, but just "44% of manufacturers and retailers with procurement standards monitor compliance with these standards and audit suppliers across commodities," says the report.

Board-level oversight on deforestation Source: CDP London December 4, 2016

Only one in five businesses responding to the survey assess deforestation-risks beyond a six-year horizon across commodities, it adds. "On average, only 30% can trace these commodities back to the point of origin," says CDP.

This report is out today because as pressure mounts for action on deforestation, more investors are joining the call for companies to disclose. CDP's forests program has new investor signatories, including UBS and Morgan Stanley, with numbers up by a fifth since 2015 to 365 institutional investors today. In total 155 companies analyzed in the report provided data on the proportion of their revenues linked to one or more of the commodities.

But, as Mr. Simpson put it: "The glass is not as full as it should be on forest disclosure. Despite the program having had a six-fold increase in the number of respondents since its inception in 2009, the response rate is still at relatively low levels - only 21% of requested companies responded to the forests information request, leaving potential risks unrevealed.